An article in Investing.com titled “How Toyota thrives when the chips are down” (March 8, 2021) describes the impact of the global chip shortage and associated auto manufacturer impact but has left Toyota unaffected. Toyota plans to increase vehicle output. The reason is identified as stockpiling of six months worth of chip supply by Toyota to ensure business continuity. An additional reason is the company’s deep understanding of all components provided by suppliers, so that they can consider substitution. Should other auto manufacturers start moving away from lean manufacturing and build up inventory? Should the stockpiled items be chosen strategically based on risk or substitution options ? Should domestic chip manufacturing in the US be a solution ?
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Global Supply Chain Musings 
Based on the discussion of stockpiling in the article, I think it is worthwhile for auto manufacturers to investigate moving away from lean manufacturing and building up inventory for parts that are critical for manufacturing. For parts that are easily sourced from multiple locations and are not very complex, I don’t think the additional holding cost of stockpiling inventory is worth incurring for having the parts always on hand. These parts would be more easily sourced from different suppliers given the simple nature of the part. However, for parts such as semiconductors that are critical to manufacturing, I do think the benefits of having extra inventory can out weight the additional holding costs. As mentioned in the article, Toyota is now seeing the advantages to having an inventory for critical parts. The amount of inventory held on hand should be determined by the specialization of the part, the opportunities to source from multiple suppliers, and the importance of the part to the end product. Therefore, items that are stockpiled should be strategically chosen based on the risk that not having the part would pose to overall operations. The article also discussed the potential for more natural disasters, higher demand, and greater competition for the same component among different industries. Due to these factors, I believe it does make sense for auto manufacturers to begin to stockpile critical parts. In terms of considering domestic chip manufacturing, I think this could be a solution, but it depends on the manufacturers current capabilities to source or manufacture the chips in the US. Setting up a domestic manufacturing would be a large commitment of time and money, so other alternatives such as sourcing from other manufacturers should be evaluated before committing to domestic production.
In peacetime with a stable supply market, lean manufacturing should work well as sourcing maps of the manufacturers can be clearly pictured. However, when the world is experiencing an extreme event like pandemics, it puts pressure on them to change their production strategy accordingly. I do not think it is a permanent change for a big company like Toyota to adopt this stockpiling for chips. It is more like a tentative response to alleviate the sudden effect of pandemics. However, it does force the globally-based manufacturers to rethink their sourcing profile and to find out the bottleneck by its potential impact on their business. Finally, from a US manufacturing perspective, it should be encouraged to supply domestically its own chips as now people know that these chips play an important role in almost every electronic device. It is not just an industrial policy and should be escalated to a national security level.
According to the article, Toyota has made a wise decision to stockpile its chips so that its outputs will not be disrupted even in an uncertain time. I, personally, believe that other automakers should stockpile essential components, such as semi-conductor and microchips, in their inventory system so that in an uncertain time, such as COVID or natural disaster, they will still have the key components to produce automobiles to meet customers’ demands. However, I believe there should be a limit on how much inventories they should stockpile because each unit will have a holding cost to the manufacturers. Components, such as paint or tires, that are not as essential as semi-conductor or engine, and thus automakers do not need to stockpile those because its suppliers will have those products available. Simply put, automakers need to strategically choose which components to stockpile. Even though the chip manufacturing in the US is an appealing idea, I believe it’s not a wise decision. Given that the US hourly wages are higher compare to the rest of the world, it will cost more for Toyota to purchase those chips from their domestic suppliers rather than international suppliers. Simply put, outsourcing to other countries but stockpile the key components are better way to keep up with the customers’ demands.
Not only should automakers move away from lean manufacturing models, but the entire tech industry should also take a page out of Toyota’s book. In years to come, long after the coronavirus pandemic has settled, every industry known to man impacted by the global shortages in technology, and logistics breakdowns will reflect on its learnings on how to establish supply chain resiliency. Toyota’s trailblazing model will become a legendary folktale of how it was able to not only maintain its production levels while competitors were forced to slow or suspend production due to several constraints in the market, Toyota will likely be able to tell a story about how they leapfrogged competitors in the market due to its increased revenue margins as others dipped. Stockpiling parts come with several associated costs, therefore it is prudent for companies to ensure they are strategic in their approach as they begin to grasp the takeaways offered in Toyotas business continuity plan. While domestic chip manufacturing may be a long-term component of managing supply chain resilience, it is not and will never be the sole solution. The cost of labor and shipping of raw materials that are sourced from other regions of the world are the primary barriers to US manufacturing. If tooling components are optimized to decrease labor, the sourcing strategy to manufacture within the US will become more advantageous. Until then, strategically stockpiling the more highly valued components within a companies supply chain will need to be evaluated and re-evaluated on an ongoing basis. While emergency preparedness and production resiliency costs, the lack of resilient investments cost companies far more. Ask automakers like Volkswagen, General Motors, Ford, Honda, and Stellantis who know first hand how the chip shortages have impacted their valuation.
Toyota has made the right choice in stockpiling essential components. It is important to also understand the current situation. Given the current shortage is easy to say that the strategy worked. Nevertheless, they didn’t know how it was going to be when they made the decision. I believe that companies should stockpile essential components that would have a great impact on their manufacturing process. No one was expecting the pandemic, but there could be other problems in the near future. Lean strategy is very useful and should not be abandoned, it lowers the cost of the supply chain, giving the company competitive advantage, but it can only work if there are no disruptions in the supply chain. Given Toyota’s success in these problematic years, I believe other auto manufacturers should start considering different strategies to address these kinds of unusual events. Manufacturing in the US it can be a secondary source of the raw material, it should be taken as an alternative for essential raw materials, but it is a short term solution, so setting up a manufacturing site in the US shouldn’t be a priority.
As the article mentions, the frequency of natural disasters has been on the rise due to global warming, which significantly impacts supply chain. Because of this, I think it is wise to shift away from lean manufacturing and build up some inventory of critical parts. If more manufacturers adopt this process, supply chain blips might no cause the same levels of damage they did when most manufacturers follow the just-in-time model. Stockpiled items should be strategically chosen to keep inventory costs as low as possible. Low risk, easy to substitute, and noncritical items shouldn’t be stockpiled, whereas high risk, no substitute, critical items should be (like the semiconductors). However, suddenly shifting to this model will probably increase stress on the already backed up supply chain in the short-term. Additionally, if technology continues to shift more and more rapidly, having too big of stockpiles could create obsolete inventory. Domestic chip manufacturing could be a solution in the US. The shorter lead time for US manufacturers could minimize supply chain issues when a natural disaster or other problem occurs. However, diversified locations of manufacturing is another solution. Even the US is not immune to natural disasters, so having a wide supply chain network of options can help more than just relocating productions to the US. Additionally, relocating these operations will likely cause a spike in prices, which customers and members of the supply chain would rather avoid.
The temporary shortage of chips for auto-manufacturer can not be considered as a long-term supply chain issue, therefore, I judge that the swift from lean manufacture to build-up inventory is unsustainable and will lose market competitiveness. However, extra efforts to maintain a safety stock level of critical parts for a product are needed and the company needs to design a reliable and effective system to quickly respond to the sudden market change, which is risk management. A diverse supplier portal is helpful to find the best substitution when an unexpected supply chain problem rises.
Having a vertical supply chain system is very ideal but costs a lot. I don’t think it is a bad thing to build up a self-sufficient supply chain without other supply chain partners’ influences. I prefer to use a combined model that my business can work well with other key components suppliers, but when emergencies and markets fluctuations happen, I can deal with it on my own as well. So yes, domestic chip supplier is a solution.
The approach that Toyota took is fundamental to Toyota. Toyota is well-known for its forward-thinking with quality and its ability to execute. Forward-thinking requires the consideration of “what if”. To perform, you must consider the possible hurdles that would prevent execution, again, “what if”. Toyota used this approach in their research and development of the Prius hybrid. The research completed in-house showed the importance of specific components needed in developing hybrids and today electric vehicles. While Toyota is a crucial proponent of lean manufacturing, the company understands that particular elements need to operate on a more traditional model, requiring a higher inventory level. Not all components require extensive inventories, significantly if the parts are commoditized items. Also, if the parts can easily be sourced from many suppliers. Or if the parts are not highly vital to the viability of the product. Stockpiling items should be considered strategically. Some things are based on the risk to the overall product, and others are based on the substation options. When stockpiling these items, it is vital to consider a few things—first, the level of obsolescence. If the part becomes obsolete relatively quickly, it may not be advantageous. Second, the storage cost. Is it possible to hold some or all additional inventory at the supplier’s facility? If so, then an agreement should be met with the supplier.
There have been discussions to have domestic chip manufacturing in the United States. This would be ideal, yet there are several reasons why this may be difficult. The first is the lack of in-depth knowledge of the technology. While people in the United States are well versed in the chip industry, it may not be enough to be competitive with others who have been working in the space for many years. Second, potentially high shipping costs from raw material suppliers to chip manufacturers. The two main materials in semiconductors are silicon and germanium. The primary producer of both is China; therefore, those materials would need to be shipped to the United States to produce the semiconductors, which is an added cost.
Yes, the other auto manufacturers should start to build up inventory for critical parts. Before building up the inventory of the parts, they should categorize all the parts base on some parameters for example:
-manufacturing country, to evaluate whether the parts have a long supply chain to reach your assembling site.
-are there any substitutes? If something happens, is it easy to find a substitute?
-critical part of the product? Will it lead to delays in our products?
In my personal experience, domestic chip manufacturing could be a solution, but it is going to be expensive to just develop the relative infrastructures and supply chain. I have 3 years of experience in the semiconductor industry, my previous company was the supplier who provides kinds of chemical materials to semiconductor manufacturing customers. Taiwan started to build up the semiconductor industry about 30 years ago, it is just not enough to only count on the power of private companies, this industry also would need the support of the government, universities to build up. Also, the upstream and downstream companies are important too, it is going to be costly to build up the manufacturing facility. Aside from the hardware and the supply chain side, I also like to point out another key point, the hardware, manufacturing site does not guarantee the quality of the chips, the chips are going to be the censor of the automobiles, it is extremely important to make sure the quality of the chips. In Taiwan, as the supplier of semiconductors, I fully concentrate on the quality of the materials that I release to the semiconductor customers, the quality standard is higher than the food grade. The reason behind this is because a chip needs hundreds of manufacturing processes to make, it could become a big problem if any little defect was caused in the making process. To conclude, making chips domestically could be a solution, but it is worth considering the cost behind the manufacturing process.
Stockpiling of six months worth of chip supply was a very good move that Toyota made. It is important to keep in mind that these one of a kind things like covid arising could happen in other ways such as any natural disasters, or political issues from the places we are sourcing from. Other companies should look into stockpiling certain items that are hard to manufacture or don’t have many substitutes in order to prevent a stockout from happening. Domestic chip manufacturing would be good in terms of lead time but not in the sense of expertise or labor cost. Sourcing from other countries would still be valuable for these reasons.
Toyota was very proactive to stockpile 6-months’ worth of chips. I think lean manufacturing is needed, but when it comes to microchips, they do not take up much space and are of high value for cars, so why not stockpile those more than other manufacturing parts. Toyota stockpiled chips after the pandemic started, but it is seen as a proactive move as there is a chip shortage at the moment. This is a temporary shortage and hopefully will not be a long-term issue. Due to Toyota’s proactive actions, this has allowed them to be a high competitor in the automobile industry at the moment. Besides chips, I do not see a need to stockpile other auto-manufacturing parts as each part will have a holding cost, and you cannot determine if the parts will be cycle out in a timely matter. Due to the shortage, everyone now knows how important and necessary chips are needed in vehicles, which is a reason why domestic chip manufacturing in the US should be a solution – again, chips do not take up much space, especially compared to the amount of costs it is for auto-manufacturers to have little to no profits with chip-less cars and for the holding cost of their parts along with labor.
Toyota is always a few steps ahead and they are not afraid to adapt. When they experienced a tsunami back in 2011, they took action to adjust their forecasts for future disasters. They also took the time needed to understand every part of their car’s technology instead of relying on the suppliers to tell them. I believe lean manufacturing is extremely beneficial for reducing waste, increasing productivity, and efficiencies. However, with climate change and other supply chain issues, it would be smart for other companies to strategically build up certain items in their inventory. To manufacture chips in the US would be extremely costly. We do not have the infrastructure or experience that they have in Taiwan since they have been doing it for years. The labor cost is also higher in the US. With this being said I still believe it would be good to have a second option to source semiconductors. It is possible to do in the long term to reduce costs in the supply chain down the road.
In my opinion, auto manufacturers should build up inventory in crucial electronic components such as chips or MLCC (Multilayer ceramic capacitors) because nowadays usage of electronic components are getting higher and higher. However, manufactures in semiconductor industry are conservative in increasing production because semiconductor industry had a tragic history in increasing manufacturing capacity after 2008 economic crisis. Take one of leaders in semiconductor manufacturing UMC as example, the stock price dropped dramatically in 2008 and had remained at low point until 2020 because of wrong evaluation of capital expenditure. Furthermore, there are not many chips suppliers in the market. Thus, auto manufactures would highly confront high risk in chip supply chain.
Related to stockpiled question, I suggest that auto manufacturers should consider both risk and substitution because low substitution in supply chain also bears with high risk. Lastly, domestic chip manufacturing solution in US is not a good solution due to labor laws and working environment. It is difficult to find such cheap and willing to work night shift labors in US rather than in Taiwan or Malaysia. Therefore, TSMC only invested 5 nm or 3nm process in Arizona.
Toyota has made incremental changes to its just-in-time playbook by segregating its approach to critical supply categories. Given its no-black box approach, Toyota has reduced the information asymmetry by allowing itself to stay closer to technological advancements. This has helped Toyota take preventive approach to mitigating risks and their approach stands as a testimonial in times of recent supply disruptions. I believe this approach would have also benefitted Toyota from its design to production cycle by reducing dependencies on critical components and keeping it to just requirements to satisfy the customers. I agree with the thought process that piling inventory can still be lean solution to business continuity plans during disruptions.
Given its early entry into understanding the chips, Toyota is also building on its competitive advantage to chip manufacturing if at all it comes to be vertically integrated or considering investments, as and when the cost of setting up semiconductor facilities go down and demand presents itself a financially viable opportunity.
While the piling of chips inventory benefitted Toyota in short term to stay ahead of its competitors, but the continuing global chip shortage is sure to catch up with Toyota’s production plans. Now the organizations would look into diversifying its supplier base and break the dependencies and monopoly of TSMC. Despite the huge investments required, the semiconductor industry will now be facing competition with new players coming into market. Bringing supply chains closer to US market will have to be evaluated with costs of such a move but also having captive production facilities still meets the requirements of a business continuity plan. The current supply shortage is not just a demand problem but also a supply problem with the lack of visibility into Tier 3 and beyond suppliers. So organizations should look backwards to having digital supply chains in-order to move forward.
As discussed, in the article automakers should have a deep understanding of all the components that goes into their final product. And to get a hold on how demand and supply are constantly evolving automakers should regularly monitor and acquaint themselves with the trends/new entrees into the critical components industries. In addition, it is always beneficial to regularly communicate with suppliers to get firsthand information. Collecting and analyzing this data would help the organizations to redevise their sourcing strategies and building inventory models. As always to stay resilient to supply chain shocks it is better to maintain the inventory buffer for critical components shipped from global suppliers. Building up inventory might be a short-term solution but it might not be a viable option in long run. And looking at the inventory capacity it might not be feasible for the organization to stockpile all the components especially for automakers who deal about 20,000 plus components. JIT/lean is still a feasible choice for that non-critical with multiple suppliers available in the domestic market. Items to be stockpiled are to be strategically chosen based on the supply chain complexities and its role in the final product. Developing a wide network of chip manufacturing companies in the US might be a solution to a certain extent but it would take a longer time to pool up resources and start the production with the capacity that would meet the current demand. Ultimately the challenges/complexities in the supply chain are never-ending. The organization which is vigilant and remodels its supply chain accordingly with the changing needs and resources sail the challenges to emerge as a market leader. Toyota’s ability to forecast the surge for the semiconductors chips and stockpiling them is a prime example.
From my point of view, auto manufacturers should build up higher inventories for key components, and keep lean inventories for other parts in low-risk supply. The reason is that automotive manufacturing is a highly capital- and labor-intensive industry so any production shutdown in car factories could cost over millions dollars or even higher of financial losses per day, and automakers’ expected savings from adopting lean inventories for all components might not be worth them taking such high risks.
The precaution against supply shortages and production shutdown is to choose and stockpile key components strategically, which in turn secures supply for production with efficient inventory holding costs, because only the parts with longer lead time and fewer alternative options have higher risks of supply disruption.
With regards with domestic chip manufacturing in the US, I do not think it would be a solution given that there are only a handful of foundries running their full capacities now, and that it would take billions of dollars and 3-5 years to build a new foundry. Even though TSMC is building a new plant in Arizona, it is with advanced 5nm manufacturing process for small devices with size and power constraints such as chips for mobiles and laptops; however, automotive chips do not have those issues and thus do not need to be that advanced. I believe sourcing globally and stockpiling strategically are the best move for automakers.
Toyota stockpiled chips for 6 months and kept its supply chain in continuity during this pandemic, and it is a lesson that they learned from Fukushima disaster. Other auto manufacturers might not be able to keep 6-months stock like Toyota, but the article mentions that Toyota lists out 500 prioritized parts to ensure their supply. It is a strategy that other manufacturers can consider how to guarantee their core business being more stable on the supply. Based on their products, they might need to ensure different parts to keep the production process smooth. The stockpiled items should consider the risk that their suppliers cannot provide enough chips to them, how critical this parts to the cars and also how competitive in the market. Even the manufacturers have substitutes, can it have the same performance with the original one or how much additional costs it requires. For the semiconductors, it has high risk to face shortage or high competitiveness. Not only automotive industries, but also mobile, or other tech industries require semiconductors. The different chip manufacturers might not provide the same quality products. Having domestic chip manufacturing cannot be a solution right away. It might be able to save the automobile industry in the future, but the car manufacturers might find out other suppliers already or the high costs of U.S. chips might be hard to car manufacturers to source.
Auto manufacturers are facing more severe chip shortage problem, because most of them adopt “Just-in-time” strategy to ensure cost efficiency. These companies should a lesson during the pandemic that it’s important to have balance between risk of inventory and risk of shortage. For parts which are easy to find alternative providers or for which the suppliers can easily increase production, auto manufacturers can still consider keeping the original just-in-time strategy. There are only 35 semiconductor companies around the world, and it is very difficult for these companies to increase production quantity within short period of time. What’s worse? Chip is vital to a car’s fundamental operation. Therefore, for this kind of part, auto manufacturers should sacrifice some risk of inventory to balance the risk of shortage. After all, if you push your partner for lower cost too far, you usually will end up with inferior services and lower priority of product supply. From government’s perspective, chips are on the list of strategic materials, therefore, overall speaking, the U.S. should consider manufacturing chips domestically to strengthen supply chains. However, from Auto manufacturers’ perspective, it might be cost efficient to manufacture chips by itself. Toyota once tried to own its chips design and manufacture factory.
My opinion is that other automakers do not necessarily have to follow Toyota’s approach at the expense of their own lean production operations. This may lead to inefficient production. A big reason for Toyota’s increase in inventory is because they predict the increase in future sales, and car sales are related to many factors. For example, a report I saw showed that during the year and a half of the COVID epidemic, sales of Toyota’s Senna, an MPV car, doubled and customers were required to purchase this car at a higher price. Behind this phenomenon, Toyota is likely to seize this opportunity to increase its chip inventory. There is also a large part of the reason because of low productivity during the epidemic, so Toyota can accumulate an inventory of chips in advance. Strategic selection of inventory should be considered based on product characteristics and product compatibility. The chip is a rapidly updated product, and the chip needs to match all the technology of the terminal product. If you excessively pursue inventory and actively look for alternatives, it will be counterproductive sometimes.
In recent years, the development and production of the chip industry have always been a sensitive topic discussed by various companies and countries. There are many voices in the past few years that the most mentioned is the localization of chips in the United States because the United States has many patents for chip development. However, the American labor force is not necessarily fully adapted to chip manufacturing, not only because of the lack of many years of manufacturing experience, but also the problem of high consumption in the supply chain. Apple’s return to the United States to produce iPad is a good example. Apple moved the iPad production line back to Texas, the United States. According to their report, the cost of production in the United States is nearly three times higher than that in China. Therefore, the localization of chips in the United States does not solve the problem well.
Lean manufacturing has been widely adopted since Toyota introduced it in 1991. Indeed, lean manufacturing improves efficiency, reduces waste, and increases productivity; however, lean has very little room for error, the error will lead to major inconsistencies and could make the entire operation fall behind. For auto manufacturers, I don’t think they have to move away from lean manufacturing, but they have to apply some advanced scheduling and planning systems combining with lean manufacturing. The company should categorize their raw material strategically by the risk and substitution options, especially for essential raw material, building up a certain inventory level to cope with the predictable and unpredictable unknowns, such as natural disasters and covid.
I don’t think manufacturing chips domestically will solve the shortage issue. The chip shortage is not that the chip manufacturer can’t build chips quickly, but that the raw materials and components purchased globally are a severe bottleneck. The shortage of downstream supply still impacts those domestic chip manufacturers. I think domestic manufacturing would be a good solution in the future, but it needs years to build up the entire chain. In the long term, the auto industry needs to restructure contacts for semiconductor-related souring.
Whether other companies should follow in Toyota’s footsteps depends on the company. Each company is going to be different in what they want to do with their inventory. This is because while it might be good for Toyota stockpile inventory, other companies might not see it that way. They might see it more financially viable to keep going the route of just having the inventory they need on hand. Now, if there is a risk that the part they might need will see a shortage, it might be worth looking into. However, I still think it would depend. Each company is going to have to do the calculations to see if stockpiling would be worth it as compared to finding an alternative if the shortage happens. Which is ultimately why Toyota started stockpiling in the first place. They think that the market is going to increase and they wanted to have a good amount on hand incase that actually happens. However, they were stilling gambling when they did that because it could turn out that the market does not increase for them.
For chip manufacturing in the US being a solution, I also think that it could depend on the company. If the cost goes up the company will have to decide if it is worth it to spend the extra money to have less of a lead time. If the price goes down, I think they should. However, it is ultimately up to the company to choose.
In “normal times” stockpiling inventory is not generally recommended due to high holding costs, so lean manufacturing (just-in-time) is favored to lower these costs. This stockpiling strategy worked out for Toyota this time but I do not believe that other auto manufacturers should follow their example for all items. This stockpiling-for-a-rainy-day strategy can be effective for items with high risk of unfulfilled orders and few substitutes but due to these parameters, these items are likely the most expensive components and will therefore yield a higher holding cost. Therefore, a manufacturer must examine the tradeoffs for each individual component. That said, the shortage persists in part due to manufacturers stockpiling chips, so this strategy propagates the problem that stockpiling is trying to solve, which continues the unfortunate cycle. This cycle is made more confusing because if one manufacturer stockpiles inventory while others don’t, then that one manufacturer will excel while the others don’t; manufacturers must have agreements to all not stockpile in order for the supply chain to recover (excluding the solution of building more semiconductors), similar to the economic prisoner dilemma.
Domestic chip manufacturing in the US could be a solution so that we don’t have to rely so heavily on off-shore semiconductor manufacturers like Taiwan. It would certainly be beneficial to US companies because the US companies would (ideally) look out for domestic interests before foreign interests in times of uncertainty. Another option is near-shoring with allies who would hopefully also hold US interests in high regard in times of shortage. Unfortunately, these options come with great economic cost.
Before making any changes to their current inventory system, auto manufacturers should research suppliers using Market Intelligence and learn about trends in the market. Auto manufacturers can categorize items based on their profit impact on the business and the supply risk. For items that have higher risks and greater impacts on the business, other auto manufacturers should stockpile consider them strategically to find the balance between transport costs and holding costs. Especially during the pandemic, when there is much variability in inventory lead time, transport costs and backorder costs can be tremendously high, in which case the total logistic cost might be lower even when the holding cost increases due to stockpiling inventories. Since the chips are critical to manufacturing vehicles, Toyota made the right move to stockpile chips. Toyota was able to continue its business plan even when its competitors are struggling to source chips. Building domestic chip manufacturing in the US is not a short-term solution to the situation that most auto manufacturers are facing. The initial investment of building a manufacturing plant, resources, and training of personnel might discourage domestic sourcing due to the economic costs.
Toyota is thinking into the future with their supply chains, an idea that many auto manufacturers should take into consideration as firms look to minimize disruptions in them. Automakers should build up a safety stock of inventory for critical components that have a higher risk of supply chain disruption. Components such as the chips needed that are an essential feature of any automobile in today’s era, should be a safety stock item kept in inventory. For the lesser important items, a different approach should be adopted. They should diversify their suppliers as much as possible for lesser important components that are not as specific to that exact model of automobile. I believe the next advancement in supply chain is not to completely step away from lean manufacturing, but to recognize that there will never be a supply chain that does not get interrupted at some point in its lifetime.
A mix of some components that are more readily available and at less risk can still be implemented into JIT or lean manufacturing, and some that firms will simply need to keep a safety stock if there are supply chain disruptions. This would allow them to keep producing at some capacity, if not full capacity. However, auto manufacturers such as Toyota need to exercise some caution when deciding what components to warehouse and the quantity of safety stock. Supply chains can be very volatile (as we’ve seen today), but it’s vital that you do not over stock on components that get updated over time, such as chips, that are continuously being improved for automobiles for each new model (Every Year). Over stocking here would waste money and space that could be better utilized. Data would be crucial here, to understand the advancement of components such as these, and to understand at what level should they set the safety stock threshold at.
One thing that the pandemic has taught the world is to prepare for the worse and since Toyota had faced similar tragedy in 2011, their decision to have increased inventory paid off. In my opinion, other manufacturers should also start making a shift from lean manufacturing to a hybrid of lean manufacturing including maintaining inventory of critical parts.
While lean manufacturing is agile and produces less waste, issues like equipment failure and delivery inconsistencies can make the entire operations fall behind and in today’s world when unprecedented events are becoming more frequent, all manufacturers should define a business continuity agreement which protocols governing inventory levels at the organization.
The items to be stocked should definitely be strategically defined taking into account factors like delivery lead time, location of the supplier.
While having the supplier in the same geographical location can reduce delivery risk, lead time, and transportation cost, it would require high time and monetary investment. Even if the chip manufacturing is shifted to the US, in the absence of any inventory, the auto manufacturer would still be relying heavily on demand planning and forecasting, which are susceptible to errors.
Based on the discussion in the article, it would seem pertinent for manufacturers to investigate creating a hybrid solution to the shortage issues being experienced due to the global pandemic. Simply moving away from lean manufacturing could create high cost to store six-months’ worth of supplies. Toyota learned a valuable lesson in 2010 after the Fukushima disaster and it would be wise for manufacturers to use the lessons being learned now to understand how to prevent delays in finishing products. There is ample data to be able to know what parts are causing these delays due to shortages and lags in the supply chain. Manufacturers should still be able to maintain lean manufacturing but create a stockpile for these parts. They should additionally look at parts that are in counties that are vulnerable to major natural disasters or have the potential for geopolitical conflict. This would be a long-term strategic solution for the what ifs in the future. Our world is getting more technology based every day. COVID has shown that on numerous levels. Most everyday objects utilize computer chips to operate. It would be wise for a company to invest in a US based manufacturing plant in case of another or a continued pandemic. In the short term, manufactures should consider solutions like Ford. Ford is starting to deliver F-150s that are fully built except for the missing chips. This will alleviate a logistics nightmare on the backend and will allow for prioritized allocation if a truck is purchased. This will also allow dealerships to have vehicles on the lot for customers to look at.
Covid-19 and other global disruptive events taught us how fragile the existing approach to Supply Chain is. Over the year, manufacturers prioritized lean over resilience. The current practice did not make enough room for cushioning the impact of variability caused by unprecedented disruptive events caused by global weather scenarios, logistics disruption, and certainly not a global pandemic. Currently, global chip manufacturing largely depends on one country, i.e., Taiwan, and the most dominant chip manufacturer is TSMC which caters to the vast majority of global chip requirements. With a shift towards electrification and self-driving technologies, the automotive industry will witness increasing demand for chips, worsening the situation. Given the existing scenario, countries and companies should have a strategy in place to counter this crisis. “Advanced semiconductors and natural resources share two essential characteristics: First, both are indispensable for our society. Second, both have limited production capacity.”(https://www.csis.org/) Therefore it is of utmost importance that countries build infrastructure within their borders to safeguard its interest. Also, Auto Companies should start building up inventories. Still, the ongoing crisis makes it harder for them to do that as companies are in a panic buying stage, and there are not enough supplies to fulfill the demand, let alone keeping inventories.
Setting up a chip manufacturing foundry takes up to 3-4 years because of the complexity of the technology. TSMC is looking at Arizona to build their factory outside China, and Intel has already pledged $20 Billion to build two new plants in the US. Till then, we would only see the crisis worsening.
Toyota’s strategy has gone to show that manufacturers need to evaluate their approaches towards inventory strategically. Just in time will save them money but then building up inventory will give them a buffer in the case of any unforeseen events like the present shortage of chips. This is not to mean that they should all consider holding safety stock for all their supplies. The approach needs to be strategic as to what would cause a catastrophic ripple effect in the event that the supply is suddenly cut off and what would be easily sourced elsewhere incase the main supplier experiences a glitch. In a perfect setting, lean manufacturing would be the most ideal setting to reduce the amount of stock lying around in warehouses but in an unpredictable scenario, the need to have stock could not be overemphasized. Some companies may be able to adjust to balancing out their approach while some may not be able to move away from just in time. This is because some industries evolve quite fast and holding stock for six months may mean you will be installing outdated components once you get to them and this might be bad for business especially with the quick shift to hybrid and fully electric cars. My take would be for the suppliers and manufacturers to coordinate to take on this risk since both are responsible at some point as to what components are in the market, the supplier could opt to hold stock enough for the period it takes for them to update the products and the manufacturer could hold stock enough to take them through more than a couple of deliveries incase they are missed.
If we look at the product Pareto chart, we know that, normally, chips are relatively high-valued production materials, and thus should be categorized as “C” category products. Because such kind of products are more expensive and with a relatively lower turnover rate, to optimize the supply chain capacity and to lower the warehouse cost, lower inventory level would be stored in the manufacturers’ warehouses.
However, learning from the painful lesson of the Fukushima disaster, the Japanese company, Toyota, realizes that even if the chips have such product characteristics, as chips are the indispensable components of their final products, they should have a higher safety stock level to avoid the shortage risks. For the other industries, for example, the retailing, the shortage of those “C” category products, such as seasonings, would also bring negative impacts on the businesses. However, the impacts would never be comparable to the automobile industry. With less diversified final products and higher value of the final products, the whole company could shut down just because of the shortage of one type of key manufacturing material. Therefore, it is reasonable for manufacturers in the automobile industry to have higher safety stock level, even for the ”C” category products.
If the other manufacturers are also planning to also apply Toyota’s stockpiling strategy, they should pay attention to “how” Toyota could successfully pile up the chips. It is never an easy task for the manufacturers to persuade their upstream suppliers to pay more warehouse costs and bear higher product storage risks to store the “C” category products. What are the key for Toyota’s success? First, Toyota pays for the stockpiling arrangement with chip suppliers by returning a portion of the cost cuts it demands from them each year during the life cycle of any car model. The costs of keeping more chips are thus shared by both Toyota and its’ upstream suppliers together. Secondly, Toyota’s long-standing policy of ensuring it understands all technology used in its cars also contributes the success of building up an efficient business continuity plan (BCP). Because of that, Toyota is able to become more sensitive and detective to the demand fluctuations of their key production components.
Lastly, I consider the consolidation of the suppliers does not necessarily mean that Toyota is losing their grip. As the suppliers are now actually a part of the broader Toyota group. If Toyota could do their internal integration appropriately, the shared information about the material demand, technology, and production would enable them to adjust and manage their inventory more efficiently.
Given the success story that Toyota thrives through the global chip shortage, I don’t think it’s wise for manufacturers to move away from lean manufacturing. Lean manufacturing has been proofed as one of the best ways to reduce cost while maintaining production efficiency. If they start to pile up inventory, the manufacturing process will become bulk again.
The main issue would be, how should they choose the stockpiled item strategically based on their decision points? On the one hand, I agree that Toyota has spent great efforts on deciding whether to pile and what to pile, on the other hand, I also believe that they were simply lucky during the global shortage while they happen to have some chip inventories. Sometimes it’s really difficult to make the decision based on risk or substitution options because supplier and customer behaviors are not easy to predict.
I think domestic chip manufacturing may be a solution to this issue because manufacturers can more easily control the chip production and the US can have the priority over other global markets. Domestic production in the US may be more costly compared to that in other countries considering labor costs, but when some severe shortage in crucial parts happens, this will become a tradeoff.
Given the success story that Toyota thrives through the global chip shortage, I don’t think it’s wise for manufacturers to move away from lean manufacturing. Lean manufacturing has been proofed as one of the best ways to reduce cost while maintaining production efficiency. If they start to pile up inventory, the manufacturing process will become bulk again.
The main issue would be, how should they choose the stockpiled item strategically based on their decision points? On the one hand, I agree that Toyota has spent great efforts on deciding whether to pile and what to pile, on the other hand, I also believe that they were simply lucky during the global shortage while they happen to have some chip inventories. Sometimes it’s really difficult to make the decision based on risk or substitution options because supplier and customer behaviors are not easy to predict.
I think domestic chip manufacturing may be a solution to this issue because manufacturers can more easily control the chip production and the US can have the priority over other global markets. Domestic production in the US may be more costly compared to that in other countries considering labor and rental costs, but when some severe shortage in crucial parts happens, this will become a tradeoff.
Lean manufacturing as we know, is commonly used to run assembly lines, but when nothing is running on time it makes sense to rethink the supply chain model. And from the article we can see that for certain components, Toyota can ask its suppliers to stockpile parts, the antithesis of just-in-time manufacturing. Parts will lead to production delays, and I will suggest other auto manufacturers should undo the just-in-time inventory and production approach to some degree. They can stockpile key parts and materials, using multiple sources. They can also build factories to produce some of their materials. With this they can create more resilient supply chains. I would suggest that the stockpile should be chosen strategically based on the risk they pose. Increasing domestic chip manufacturing should be a priority even if the pandemic did not happen, however the outbreak showed the risks of being dependent on limited, overseas suppliers of critical products and technologies.
Lean manufacturing is known to be “The Toyota Way”. It is a production system which is designed to help reduce times within the production operations in addition to improving supplier’s efficiency and responsiveness to customers’ demand. It was established by Toyota company in 1930. Not only this method has shown to be a great practice over the years, but it is a creation of Toyota. However, even great systems might fail to produce great results in particular circumstances. In this instance, Toyota recognized the limitation or potential risk of their own system and proactively planned and executed a contingency plan to ensure continuity of their operations even in the case chip shortage on the market. The takeaway here, is that, yes lean manufacturing is a great system; but is there any area or scenario where it might not work? And the answer is indeed there is, and perhaps in more than just this one example. It is reasonable to predict that for many items, those which could be considered as commodity products, stockpiling may not be necessary. Such items tend to be readily available on the global market, at somewhat a unified global price, supplied from all around the world. So, suppliers can be replaced without grave impact on production planning as well as company bottom-line. This analysis can also be made about items that are easy to substitute, considering substitute products are readily available to buyers. For manufacturers like automakers, with intensive-production activities, it critical to ensure that all required parts are available whenever needed in the assembly process. Because, short of such assurance, the production scheduling can be gravely disturbed whenever there is any shortage or inventory uncertainty.
In conclusion, contingency planning or better yet, alternative supply chain strategy like stockpiling would be a smart option to ensure no disturbance or very limited impact in case of supply shortage. For certain items, perhaps chip, automakers in the US could benefit from the establishment of a sustainable domestic supplier’s base. It is worth noting that, in the past couple years, COVID-19 global pandemic has exposed some of the worst disadvantage of situations like supply shortages and supplier’s dependency. When a product is not diversly available on the market, it becomes very critical to design a supply chain which provides for effective and efficient demand responsiveness from a manufacturer’s supplier base.
Just because the automobile industry needs to maintain lean manufacturing for efficiency purposes doesn’t mean that even if there is a risk of shortage associated with any part, the company should not use risk hedging strategies by stockpiling.
Toyota has shown its supply chain resilience and has opened yet another new dimension of competition in the automobile industry – Supply Chain RESILENCE. Covid has exposed the vulnerabilities associated with lean manufacturing. Lean manufacturing is moving towards ‘Resilient Lean Manufacturing’ to mitigate the risks associated with supply chain disruption.
Flexibility is the key to sustainability. If auto companies can be flexible, they can no longer be stable and sustainable. Coming straight to the point, companies should do supply chain audits, including ABC analysis & XYZ analysis (incorporating demand fluctuation) for all the components that go into making their cars. Wherever there is a high risk associated with supply chain disruption either on account of the limited supplier, the criticality of the part, etc., companies should consider stocking them to avoid plat shutdowns observed during the pandemic. Other factors such as strategic risks and substation should also go in the decision-making of whether to stock or not to stock.
COVID-19 had made supply chain resilience as vital to auto-industry profitability as supply chain cost and performance. In my opinion, temporarily stockpiling is just pivoting the supply chain. When the risk associated with supply chain disruptions subside, auto manufacturers can re-pivot their lean manufacturing strategy.
As mentioned in Article, Toyota had learned a great lesson from Fukushima Disaster that occurred in 2011, at that time Toyota team realised that lead time for critical items such as semi-conductors become way too long (because of natural disaster), resulting in disruption of manufacturing volume and drastic drop in sales revenue. As a preventive measure for future disruptions, Toyota team shift their focus from standard methodology of just-in-time manufacturing to stockpile inventory of critical components, as a result during Covid-19 Pandemic Toyota team was able to continue operating their assembly line properly while other automobile manufacturers (such as Volkswagen | General Motors | Ford | Honda) were facing crisis of chips shortage.
Similarly on Toyota approach, other manufacturer should also list out their critical component and encourage stock pile of inventory (2-4 Months) at supplier ends (by providing some incentive schemes). Inventory pile up of critical components will enhance company disruption cushion against unforeseen circumstances and make their supply chain more resilient. Apart from becoming risk-averse, company should also focus on finding substitute or alternate vendor for critical components to response effectively to changing market dynamics and achieve higher customer fill rate. From perspective of lead time, shifting chip manufacturing in USA is good option, but from cost perspective it can prove a bad decision (because of higher labour cost, strict regulation and higher tax rates). Company should carefully balance out their Holding cost and disruption in production volume because of component shortage.
In the End, I would like to comment that because of Covid-19 Pandemic, major companies have realised importance of Inventory stock to handle unforeseen circumstances effectively.
In my opinion, auto manufacturers should start building up inventory, but the question is, at what level?
Due to global warming, the intense international situation and the pandemic, the world has become more unstable, and this predicament couldn’t be solved in a short while. Auto manufacturers need to find a way to face it. Toyota faced a chips shortage after the earthquake in 2011 and changed their inventory policy, which proved to be effective for preventing the loss from disasters. Auto manufacturers could follow up Toyota with a second-mover advantage. They could lower the lead time of critical components which usually don’t have substitutes and stabilize the supply to reach a better fill rate. However, stockpiling also brings costs. One is the holding cost. Since critical items’ value is often high, such as semiconductors, the holding cost is also higher than other components. Another cost is losing the opportunities to get better components. For example, semiconductors follow Moore’s law which implies rapid technological development.
Coming back to the question of at what level they should stockpile, auto manufacturers have to examine their margin and products to evaluate the level. If they are selling low price, low variety products, the stockpiling level should be higher. On the other hand, if they are selling customized cars or luxury cars, they could lower the levels. Besides, they could also consider the possibilities of domestic chip manufacturing. There are more and more plants moving to the US, and therefore auto manufactures may cut down the stockpiling level by then.
Given the number of supply chain disruptions happening thought the year, auto manufacturers should definitely relook into their existing supply chains. For the automobile sector specifically, several parts are coming in from different parts of the world, making them more susceptible to world events and disruptions. Lean manufacturing works well when you have a continuous pipeline of inventory coming in, and the system is able to absorb any disruption of supply for 3-4 days and not beyond. The critical ratio, which is the ratio of the cost of shortage to the sum of the cost of shortage and excess inventory, must be evaluated. It is best that Auto industries map their supply chain and identify supply risks, and consider scenario planning to prepare for multiple potential failures
Chip shortage has been the topic of discussion in the Automotive Sector. Toyota has made changes to the just-in-time approach to stockpiling back a decade to the Fukushima disaster which has resulted in continued production while other auto companies have been forced to slow or suspend production. I believe that moving from lean manufacturing to build up inventory is the best approach at this point as it has also been speculated that the chip shortage will continue to be there for another 2 years until more capacity has been added in the future. So, stocking critical components can be a good solution to continue business during the COVID disruption.
The critical items should be chosen based on the risk as emergencies can arise at any time. Under such a situation, if critical items have been sourced by keeping in mind the risk factor that will help in a seamless supply chain.
Stockpiling has benefitted Toyota to stay ahead of competitors during COVID times, but a continued shortage in chips will affect their production. Companies should start looking into alternative plans like diversifying their supply base. Semiconductor chip manufacturing has been a monopoly business that has been acquired by few organizations. Companies should look into breaking these dependencies by alternative. Recently, TATA group has announced to enter into semiconductor manufacturing in India. Bringing the production domestic can be a solution to the problem but it needs to be evaluated on a cost basis.
I think it is hard to place blame on other car manufacturers for failing to predict/prepare for a shortage of this magnitude. Regardless of what other manufacturers chose to do in response to the chip shortage, it will be a reactionary response as opposed to a calculated preventative action. This means that manufacturers may have to weigh the possibility that in the time it takes them to realign their supply chains and restructure their inventory processes, the chip shortage may resolve itself. In terms of future decisions, manufacturers could decide to use this specific scenario as a benchmark to spur innovations and adjustments across their sourcing strategies. Toyota showed that investing into inventory of critical components, such as chips, can ensure that even when the supply chain is lean you have enough on hand inventory to cover a momentary shortage in the supply chain. This practice might only be viable for components with exceedingly high levels of technical specification. For example, if there is a shortage of a common component such as polyester for their seats, Toyota can simply expand their supplier pool without sacrificing their standards. In order to spur domestic development of chips to the volume required by the auto industry, manufacturers would have to either establish their own divisions to meet their demand, or entice preexisting companies to massively increase their output.
There are hundreds of variables that should be considered when deciding which component is worth to stockpiling and which no. Stockpiling chips, according to the article, was a smart decision from Toyota. This is a component which scarcity would stop the entire operations of any automobile manufacturers and its holding cost is not as expensive as tires or engines. Because this is a very specific industry (the chips one), that is not developed here in the US, makes sense to be prepared in case of any harmful events. Nobody thought that this pandemic would cause too many restrictions, however lots of companies could manage their operations and minimized impacts in their production process, giving a sense of well planning practices. Specifically, in the automotive industry, companies have to re-think their capability to react in case of non-thinkable events (natural disasters, other pandemic, world recession, scarcity of any natural component, etc.etc.). Based on the worst scenario, being prepared to face it successfully to minimize impacts in the production chain for at least 6 months would be a good strategy. Finally, the production of chips in the US will make more expensive the entire cost of a car, nevertheless is another good alternative if this industry wants to diversify risks. In addition, if chips are produced in closer areas like Mexico or any other countries of Central America, would become in a good risk-diversify.
Toyota has a deep understanding of how the market can affect their own business; which means that their decision might not be beneficial for other auto manufacturers. In my opinion, if Toyota’s competitors want to make the same decision, they will have to analyze if stockpiling certain components is necessary, and how it would affect their overall inventory cost. However, they could stockpile on parts like microchips or certain parts that are critical to the making of their automobiles and that are projected to have shortage in the overall industry. In addition, they should identify different supplier bases for each of the critical components; this will allow them flexibility whenever a shortage crisis hits. The strategically chosen items should be based on both risk and substitution because, as mentioned, we never know when the next crisis will hit. Identifiying subsitutes should be part of the risk management as serve as a plan B. Domestic chip manufacturers could definitely be an option as there are many opportunities for development as production might fully move back in the US in a few years. It wouldn’t be a bad idea for a company like Toyota to partner up with a chip manufacturers and develop a product that can be only for Toyota, but also for other industry leaders. This would definitely give Toyota even more credibility in the industry.
After Fukushima disaster, Toyota indeed made a smart move by stockpiling 6 months of chips including 500 other items that it believed to be the key items which needed a secure supply to maintain the production stability. Since manufacturing of chips needs strong engineering expertise and cannot be easily substituted, I think the other auto manufactures should move away from lean manufacturing to stock piling of electronic chips. This will help them to maintain the production during such natural disasters or pandemic situations.
The level of inventory to stockpile should be carefully assessed based on the inventory holding costs and demand forecasts. According to me, manufacturing the chips in the US may not be a good option because they will end up incurring high costs because of expensive labor and also for training the resources and building up the supply chain.
Not only chips, but also components that are important for the company both in terms of economic impact and for supply conditions from complex and / or risky markets belong to the objects that required to build up inventory. Of course, we cannot ignore the inventory cost. For example, inventory cost required to store a certain number of large parts such as electric-vehicle batteries is far greater than that of storing the same number of chips. Therefore, with reasonable inventory costs, auto manufacturers could build up inventory of some strategic items.
Chips could be considered as a component that is critical to operation and direct impact the business, so sourcing in multi-suppliers helps to share risks.
This is a very interesting and complex decision for auto manufacturers. If they do not give away lean manufacturing and continue with lean, then they are more likely to face shortages in near future. Rare earth metals are difficult to mine and with increasing demand for chips, the shortage problem is expected to last for a long time.
On the other hand, if auto makers give away the lean manufacturing and start piling up inventory then it will create a strong bull whip effect in the entire chip supply chain. It will also impact supplies for other industries like aviation, IT, smartphone etc. Giving up lean would mean greater supply chain disruptions because the supply for chip is limited and demand is increasing exponentially. Giving up lean would benefit big auto companies like Toyota who has significant leverage over suppliers. Small players would not be able to bear the impact of bull whip effect and the costs associated with it.
I would say that companies should continue with lean manufacturing for chip manufacturing and start making capital investments in chip manufacturing companies and rare earth metal mining companies to bring resiliency in their supply chain. Domestic chip manufacturing in USA can be a potential solution. Auto manufacturers should start investing and developing infrastructure and expertise for manufacturing their own chips. It will vertically integrate their supply chain and help them with shortage issues.
The perfect understanding of the components and stockpiling of up to six months are definitely TOYOTA’s competitiveness when competing to other competitor or face any global supply chain challenge, such as shortage this time. From my perspective, if any company would like to imitate the success, they don’t have to do exactly 100% the same as TOYOTA does, they can take hybrid one.
The first step is to analyze which components should be considered stockpiling and how the overall inventory holding cost will increase? Secondly, to share the risk involved, they can turn to resort to find substitutes to minimize risk as least as possible, after all, the uncertainty in the future is unpredictable and can not be avoided at all. At last, I do not think the option domestic chip manufacturing is a good idea, since the labor cost is far larger than outsourcing. To sum up, understanding the components, stockpiling when needed and outsourcing are the primary keys to success.
Toyota has taken a wise move of stock piling chips for future. Chips are parts which do not have many manufacturers and cannot be manufactured internally without much expertise and equipment. This stockpiling had enabled Toyota to manufacture vehicles despite shortage and unavailability of chips during the pandemic. Other automobile companies should also think about stocking some important parts but should not completely move away from lean manufacturing. They should stock only those parts that are difficult to find a substitution and cannot be manufactured internally. Chips are also small in size and require low holding costs. Another factor to consider while choosing parts to stockpile is the risk. If there is very less risk of the part becoming unavailable or if the part has many available substitutions, then there is no use in stockpiling and losing holding costs. Chip manufacturing is not a small venture or investment. It requires huge capital as the manufacturing plants for the chips are usually very large and include costly equipment. Setting up chip manufacturing in US, should be thought of wisely considering factors like whether how long the effect of the pandemic will last and will they be able to produce chips at lower cost than their competitors to stay in competition after the pandemic situations settles.
As we all know, the manufactured cars’ price went up a lot due to the shortage of chips. Because of the high price of new cars, the used car market is also in a crazy situation. Due to the pandemic, the capacity of car chips is still low than usual and it will last a long period of time. The advanced technology should company with matched hardware. This is the problem that many car manufacturers faced. At this point, Toyota made a good choice to stockpile six months’ worth of chip supply to ensure business continuity. This is why Toyota’s car still keeps the same price pre-pandemic in the situation of shortage of chips. In my personal perspective, it is necessary for car manufacturers to keep chip inventory in advance. If other autos manufacturers start moving away from lean manufacturing and building up inventory, they should notice that their revenue may go down. Whether the stockpiled item is risk or substitution options depends on the market for sure. If the demand is high, there is no doubt for them to keep inventory in order that they can survive in the pandemic.
Toyota’s moves towards larger stockpiles and lowered reliance on just-in-time supply systems is a smart move to make for other auto manufacturers, given current trends in the auto industry and the potential risks for global supply chains. Even without the consideration of COVID-19, further constraints from climate change and limits in shipping capacity could hurt the supply chains of other manufacturers. Stockpiles of essential components would be invaluable in maintaining steady production, although the exact quantity stockpiled may be more difficult to quantify.
However, domestic chip manufacturing may not be the best solution for all automobile manufacturers. Those production lines are expensive and risky, requiring specialized equipment and personnel to get up and running. Even once local suppl becomes available, to costs and quantities involved may not be compatible with the options provided by producers overseas. While it may make a good backup plan, it should be considered whether the risks involved are great enough to set up separate production lines rather than just larger stockpiles.
Lean manufacturing is known to be “The Toyota Way”. It is a production system which is designed to help reduce times within the production operations in addition to improving supplier’s efficiency and responsiveness to customers’ demand. It was established by Toyota company in 1930. Not only this method has shown to be a great practice over the years, but it is a creation of Toyota. However, even great systems might fail to produce great results in particular circumstances. In this instance, Toyota recognized the limitation or potential risk of their own system and proactively planned and executed a contingency plan to ensure continuity of their operations even in the case chip shortage on the market. The takeaway here, is that, yes lean manufacturing is a great system; but is there any area or scenario where it might not work? And the answer is indeed there is, and perhaps in more than just this one example. It is reasonable to predict that for many items, those which could be considered as commodity products, stockpiling may not be necessary. Such items tend to be readily available on the global market, at somewhat a unified global price, supplied from all around the world. So, suppliers can be replaced without grave impact on production planning as well as company bottom-line. This analysis can also be made about items that are easy to substitute, considering substitute products are readily available to buyers. For manufacturers like automakers, with intensive-production activities, it critical to ensure that all required parts are available whenever needed in the assembly process. Because, short of such assurance, the production scheduling can be gravely disturbed whenever there is any shortage or inventory uncertainty.
In conclusion, contingency planning or better yet, alternative supply chain strategy like stockpiling would be a smart option to ensure no disturbance or very limited impact in case of supply shortage. For certain items, perhaps chip, automakers in the US could benefit from the establishment of a sustainable domestic supplier’s base. It is worth noting that, in the past couple years, COVID-19 global pandemic has exposed some of the worst disadvantage of situations like supply shortages and supplier’s dependency. When a product is not diversly available on the market, it becomes very critical to design a supply chain which provides for effective and efficient demand responsiveness from a manufacturer’s supplier base.
Lean manufacturing is known to be “The Toyota Way”. It is a production system which is designed to help reduce times within the production operations in addition to improving supplier’s efficiency and responsiveness to customers’ demand. It was established by Toyota company in 1930. Not only this method has shown to be a great practice over the years, but it is a creation of Toyota. However, even great systems might fail to produce great results in particular circumstances. In this instance, Toyota recognized the limitation or potential risk of their own system and proactively planned and executed a contingency plan to ensure continuity of their operations even in the case chip shortage on the market. The takeaway here, is that, yes lean manufacturing is a great system; but is there any area or scenario where it might not work? And the answer is indeed there is, and perhaps in more than just this one example. It is reasonable to predict that for many items, those which could be considered as commodity products, stockpiling may not be necessary. Such items tend to be readily available on the global market, at somewhat a unified global price, supplied from all around the world. So, suppliers can be replaced without grave impact on production planning as well as company bottom-line. This analysis can also be made about items that are easy to substitute, considering substitute products are readily available to buyers. For manufacturers like automakers, with intensive-production activities, it critical to ensure that all required parts are available whenever needed in the assembly process. Because, short of such assurance, the production scheduling can be gravely disturbed whenever there is any shortage or inventory uncertainty.
In conclusion, contingency planning or better yet, alternative supply chain strategy like stockpiling would be a smart option to ensure no disturbance or very limited impact in case of supply shortage. For certain items, perhaps chip, automakers in the US could benefit from the establishment of a sustainable domestic supplier’s base. It is worth noting that, in the past couple years, COVID-19 global pandemic has exposed some of the worst disadvantage of situations like supply shortages and supplier’s dependency. When a product is not diversly available on the market, it becomes very critical to design a supply chain which provides for effective and efficient demand responsiveness from a manufacturer’s supplier base.
Lean manufacturing is known to be “The Toyota Way”. It is a production system which is designed to help reduce times within the production operations in addition to improving supplier’s efficiency and responsiveness to customers’ demand. It was established by Toyota company in 1930. Not only this method has shown to be a great practice over the years, but it is a creation of Toyota. However, even great systems might fail to produce great results in particular circumstances. In this instance, Toyota recognized the limitation or potential risk of their own system and proactively planned and executed a contingency plan to ensure continuity of their operations even in the case chip shortage on the market. The takeaway here, is that, yes lean manufacturing is a great system; but is there any area or scenario where it might not work? And the answer is indeed there is, and perhaps in more than just this one example. It is reasonable to predict that for many items, those which could be considered as commodity products, stockpiling may not be necessary. Such items tend to be readily available on the global market, at somewhat a unified global price, supplied from all around the world. So, suppliers can be replaced without grave impact on production planning as well as company bottom-line. This analysis can also be made about items that are easy to substitute, considering substitute products are readily available to buyers. For manufacturers like automakers, with intensive-production activities, it critical to ensure that all required parts are available whenever needed in the assembly process. Because, short of such assurance, the production scheduling can be gravely disturbed whenever there is any shortage or inventory uncertainty.
In conclusion, contingency planning or better yet, alternative supply chain strategy like stockpiling would be a smart option to ensure no disturbance or very limited impact in case of supply shortage. For certain items, perhaps chip, automakers in the US could benefit from the establishment of a sustainable domestic supplier’s base. It is worth noting that, in the past couple years, COVID-19 global pandemic has exposed some of the worst disadvantage of situations like supply shortages and supplier’s dependency. When a product is not diversely available on the market, it becomes very critical to design a supply chain which provides for effective and efficient demand responsiveness from a manufacturer’s supplier base.
I believe lean manufacturing is an excellent practice to keep, but the impact of the global chip shortage did indeed expose the necessity of stockpiling on critical manufacturing parts. I also believe that it is unwise to blindly stockpile all sorts of inventory. During the chip shortage, Toyota was able to sustain and even increase production by keeping good track of the critical production parts and being able to spot signs of shortage before it even occurred.
Therefore, I recommend auto manufacturers to adapt stockpiling evaluating based on risks while still practicing lean manufacturing. More specifically, manufacturers should only stockpile critical parts where low inventory volumes do will severely hinder auto production. It will be very beneficial if manufacturers can practice good coordination with their suppliers in order to keep track of the steadiness of the supply flows and foresee potential shortages. It will also be beneficial to multi-source on these critical parts to better prevent shortages.
There are a lot of uncertainties on switching to domestic chip manufacturing. Domestic manufacturing labor cost is very high, and the amount of skilled labor on chip manufacturing is not guaranteed, but from a logistics standpoint, domestic manufacturing will trim the costs for US auto manufacturers.
Chip shortage has been an ongoing debate in the Automotive Sector. Although Toyota has made a well-planned switch from the lean approach to stockpiling which has resulted in continued production while other auto companies had to cut down or suspend production. I believe that the global chip shortage is sure to catch up with Toyota’s production plans therefore moving from lean manufacturing to a hybrid of buildup inventory and lean is the best approach at this point. Stocking critical components and then continuing with the lean process where the supply is adequate can be a good solution to continue business during this post pandemic era. Companies should also start looking into alternative plans like diversifying their supply base. domestic production can be a solution to the problem, but it needs to be evaluated on a cost basis. Moreover, due to the ever-changing supply lead times due to the pandemic having a detailed idea on the supply chain bottle necks is of upmost importance for any company.by continuously assessing the risk associated with both the options of stockpiling or lean manufacturing companies can be flexible in switching between these two methods and thereby continue to move forward even in unprecedented times.
In my opinion, the other auto manufactures should not start moving away from lean manufacturing and build up inventory. When a manufacturer faces the shortage of critical components, the situation will reach an impasse. The inventory will not be enough to be supplied to upstream. But, to change the strategy from “pull” to push, which means to build more inventories than demand, the holding costs will rise dramatically. For the finished products, it requires large space to maintain, which means more warehouses, larger warehouses, more staffs, and more operation costs. On the other hand, for some critical component like chips, it is limited to store under certain conditions, including temperature and humidity. To build a qualify environment for storage, more money needs to be invested.
Substitution options are necessary to pre-planned. And domestic chip manufacturing in US is definitely a solution. In the past, we imagine the wonderful scene of globalization, and believe in the global supply chain. However, histories told us they could not be fully trusted, not only because of some sudden and short-term crisis like Covid, but also some political games between countries may influence the supply chain. For example, Huawei, the Chinese mobile device manufacturer, could not achieve chips anymore from a manufacturer in taiwan because of some policies. Huawei’s production and inventories are affected significantly. From Huawei’s case, we learned not to rely on others too much. It will be fantastic if a company can own some unsubstituted technologies by themselves. But there is one more thing I would like to say, that it is still related with a company’s financial situation to decide whether to build labs and develop technologies.
We can clearly see that Toyota’s stockpiling strategy helped the company to ensure business continuity. It definitely made them more competitive in the market because while Toyota’s competitors are trying to find chip suppliers because of the shortage, Toyota successfully continued its operations. Toyota’s stockpiling strategy for chips could cost them a higher holding cost but it doesn’t mean that it is not an optimal strategy especially in the pandemic situation. When companies are looking for specific auto parts such as chips and if there is a shortage of chips, it is predictable that suppliers would try to sell these parts for really high prices and since auto companies need to continue their operations, they will pay the price that suppliers desire. In this case, stockpiling specific auto parts and incurring higher holding costs seems like a better option than trying to find a supplier to buy chips at a cheaper price during the shortage.
On the flip side, it doesn’t seem to be an optimal strategy to stockpile every auto part because only some specific parts are shipped from far locations and there is a high demand for these parts. Most of them are low shortage risk components which means that the companies can easily receive them even during a pandemic. The companies need to implement stockpiling strategy only for those components which have a higher probability of shortage. The shortage is not only the result of a pandemic, it could be the result of higher demand, natural disasters, etc. The auto manufacturers need to consider all these factors and implement an “optimal” stockpiling strategy for specific components based on their shortage risk factors.
Finally, I don’t think domestic chip manufacturing in the US could be a solution because the specific reason for auto manufacturers to import these parts from different locations is cheaper prices. Higher component prices and a higher hourly wage of labor in the US could cost companies higher prices for these auto parts which doesn’t seem to be an optimal strategy for these firms.
I think that it is difficult to say that other auto manufacturers should fall in line with Toyota’s practices because of the pandemic. This pandemic is likely a once-in-a-lifetime ordeal, however that doesn’t downplay the success that Toyota saw as they were able to increase profits by 34%. This was a win for Toyota from a standpoint of preparedness combined with opportunity. From their previous issues on supplying semi-conductors following the Fukushima disaster they knew that if anything of the sort happened again they wanted to have a stock-pile ready to continue manufacturing. If other auto manufacturers wanted to follow this practice and move away from lean manufacturing it would likely be in preparation for similar disasters and pandemics that Toyota has seen. If manufacturers did move away from lean manufacturing they would certainly have to strategically decide what materials they would want to stock-pile based on a risk and substitution options basis. If US chip manufacturing became viable from a cost-standpoint then it would save transportation costs as well as reducing lead times. However, it is likely cheaper to source the chips globally, and who’s to say there isn’t a disaster domestically that would give manufacturers just as much trouble as it may overseas. Overall, if a manufacturer decides that it is strategically the best option to stock-pile some parts then there is merit given the success that Toyota has seen, however lean manufacturing is likely the best option when there isn’t something crazy, be it a disaster or pandemic, going on in the world.
Toyota made a rational decision for stockpiling the chips to avoid the chip shortage. Like many other industries, the auto industry has had issues in getting the appropriate materials needed. So, Toyota decided to stockpile about six-months of chip supply. Toyota also realized that for components, substitutions are needed to be considered during situations like these. I think for particularly devastating situations, required or high-risk components are necessary to have a build-up inventory. Required or high-risk components are parts that are absolutely necessary for the organization’s product or is a harder part to source. Stockpiles should be chosen based on risk options because then the organization has time to figure out the plan for when the risk is averted. For items that can be substituted, organizations do not need to stockpile because they already have a backup plan for that part. I think domestic chip manufacturing the US can be a solution for strong needs, typically in the US, parts/chips can be costly. So, in order to avoid costs, companies should try to find accommodations for various parts in the event something like shortages occur again.
I would agree with the most that stockpiling would be a great way to have enough supply and be able to produce cars when needed. If suddenly all car manufacturers say let’s stockpile, how will this affect the demand? This decision should be made collectively by world governments where they define goods based on substitution options. If you are having lots of substitutes, I would not argue with companies wanting to stockpile, but if there is a component which is crucial in everyone’s production, such as MCU, then you would have to agree that there should be a threshold on how much can I carry inventory. So going back to our first discussion on transferring manufacturing to US, if you have a product that has a certain threshold then maybe you should produce it locally so other manufacturers are able to have enough supply. Now the competition would increase because everyone would see different part as crucial or not enough substitutes. Coordination should be first step in addressing this issue. Aligning with manufacturers on critical items that they can only have a certain amount of inventory then we would be having a less variable fluctuations on demanding MCU.
On the other hand, I would say that car manufacturers should focus on starting to produce their own critical goods. This will help with lower manufacturers to increase revenue, reduce lead time, and reduce demand variability. Proper chain structure will be the key in addressing question, should I stockpile or not?
Applying lean manufacturing techniques to the inventory is productive in a regular world without shortages. There are a ton of parts that go into the car; many of them are outsourced. Automakers should have a detailed understanding of the importance of these parts and their availability. Through lean manufacturing, companies can reduce inventory carrying costs by having a solid supply chain. However, given the recent climate change effects, this chain could be disrupted regularly, which would have lasting effects on the company’s growth. In the priority list, parts essential to manufacturing the car, like semiconductor chips, should be stockpiled as these are small in size leading to low inventory costs. However, missing these will impact the whole production cycle. On the other side, stockpiling parts like tires and aluminum is not required since their supply is abundant. Manufacturing chips in the US is a viable idea if most of the manufacturing process is automated with as little manual intervention as possible due to the high wages compared to countries like China and India. Finally, the companies should stockpile parts whose lead time increases due to natural disasters/ pandemics.
The question relies on the size of different auto company. Toyota is a big corporation with operation around the world, they have the money to afford the safety stock and also chips are not easily perishable goods, it is not like that chip will expired in a year or two, therefore for company that has same size as Toyota, they can afford stockpiling safety stock for like 6 months. But for many other small or medium sized auto company, it would not always be wise to have a build up inventory. The choice between lean manufacturing and build up inventory should always depend on the characteristics of the product and the manufacturing operation each company has. As for chips, I would say that it would be good do build up inventory for auto company as chips can be a very unique item. That also means that stockpiled item should be chosen based on substitution options. If the product is something that has many similar substitutions, it would be good to have a lean manufacturing, but if it is something that is hard to replace, build up inventory would be necessary. Domestic chip manufacturing in the US should always be a solution as the global shipment can be delayed due to many reasons, especially the recent pandemic. Have some domestic chip manufacturing option in the US can help overcome emergency situations.
Toyota has made a smart move to hold inventory its chips so that its outputs will not be disrupted. However, this doesn’t guarantee stability for the company, as the stockpiling only led the company to kick the can down the road, rather than address the problem. However, due to this stockpiling, I do think that insiders have some incentive to manipulate markets in the coming months, and this can lead to major international problems.
In this instance, Toyota, an organization that promotes lean manufacturing, ironically has more chips than any other company in the industry. This proves that lean manufacturing not only targets low inventory levels, rather addresses overall reduction of costs (lost sales in this example).
Furthermore, addressing this through the localization of manufacturing seems like a promising idea, but execution can take years. Building, establishing an infrastructure, and addressing the supply chain will take multiple months or even years. Nonetheless, reliance on international locations such as China, Korea, and Japan has shown to be risky, so control over the supply chain can be addressed through localization (at least in emergencies).
According to Executive Order 14017, a 100-day review took place an the report was published as “BUILDING RESILIENT SUPPLY CHAINS, REVITALIZING AMERICAN MANUFACTURING, AND FOSTERING BROAD-BASED GROWTH”. Based on this report, chips and semiconductors are critical materials and the author recommended that US needs to promote domestic sourcing for these items and take a leadership position for chips and semiconductors. Therefore, after reading that report, I believe critical materials needs to be invested for domestic productions.
As for as Toyota, they have excellent scenario planning as well as when they find a supplier, they go through a rigorous process. For example, they will ask their supplier what are their plans if half of the factory or equipments get destroyed? Toyota have multi-level scenario planning for themselves and their suppliers.
https://www.whitehouse.gov/wp-content/uploads/2021/06/100-day-supply-chain-review-report.pdf?utm_source=sfmc%E2%80%8B&utm_medium=email%E2%80%8B&utm_campaign=20210610_Global_Manufacturing_Economic_Update_June_Members